Nature and Science, 5(3), 2007, Yihai Liang. Ten Propositions for Law of Increasing Marginal Utility
Ten Propositions for the Law of Increasing Marginal Utility
Yihai Liang
College of Economics and Management, Ping Yuan University, Xinxiang, Henan 453003, China;
yihailiang@gmail.com
Abstract: It is called “the law of diminishing marginal utility” that Marginal utilities are diminishing
across the ranges relevant to decision-making. However, it will not always hold. Sometimes an amount
added brings things past a desired “tipping point”, or an amount subtracted causes them to fall short. In
such cases, the marginal utility of a good or service might actually be increasing. This paper investigates
Xinfei Corporation’s rapid growth, and proposes ten propositions for the law of increasing marginal utility.
[Nature and Science. 2007;5(3):72-77]. (ISSN: 1545-0740).
Keywords: Marginal Utility, Mechanism of Creative Process, Three-color Business Management
1. Introduction
Since 1986, Xinfei Corporation, a Chinese high-tech company, grows rapidly. In this paper, we
compare the development of Xinfei Corporation with the development of other Chinese companies and
some foreign companies, and conclude that: (1) Under China’s new market economy mechanism, Xinfei
developed in a new progressive mode, “Invest → Increase → Re-invest → Re-increase”; (2) The most
important fact of Xinfei’s development is “Innovation”. These two conclusions can partially prove the law
of increasing marginal utility. Thereby, management innovation can be constructed on this law. The law of
increasing marginal utility provides a new economic theory for business management innovation. We also
propose ten propositions for this law. These ten propositions play a significant role in economics, which can
be considered as economic “Goldbach Conjectures”.
2. The law of increasing marginal utility
2.1 Related work
In this paper, we focus on the proof and explanation for the law of increasing marginal utility based on
the reality of Xifei’s amazing development. Using this law, a new development mode for companies in the
current era based on information economics is proposed as: “Innovation → More Innovation”. This mode
will result in a new revolution for companies’ administration. Up to the present, the law of increasing
marginal utility is still a state-of-arts theory.
In The Manifesto of Communism [1], K. Marx and F. Engels proposed that the bourgeoisie cannot
exist without constantly revolutionizing the instruments of production, and thereby the relations of
production, and with them the whole relations of society…The bourgeoisie, during its rule of scarce one
hundred years, has created more massive and more colossal productive forces than have all preceding
generations together.
In Capitalism, Socialism and Democracy [2], J. Schumpeter proposed that as soon as quality
competition and sales effort are admitted into the sacred precincts of theory, the price variable is ousted
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Nature and Science, 5(3), 2007, Yihai Liang. Ten Propositions for Law of Increasing Marginal Utility
from its dominant position…But in capitalist reality as distinguished from its textbook picture, it is not that
kind of competition which counts but the competition from the new commodity, the new technology, the
new source of supply, the new type of organization (the largest-scale unit of control for instance) –
competition which commands a decisive cost or quality advantage and which strikes not at the margins of
the profits and the outputs of the existing firms but at their foundations and their very lives. This kind of
competition is as much more effective than the other as a bombardment is in comparison with forcing a
door…
The above propositions have explained why capitalist economy grew such rapidly, and how this
economy machine ran automatically. In addition, they discussed how innovation plays an important role in
the open market economy, and explained the open market economy by “innovation”. Our research, the law
of increasing marginal utility, is actually based on K. Marks, F. Engels, and J. Schumpeter’s illustrations
about the development miracle of the open market economy. Our research includes: (1) Combining their
theories with the practice of enterprise’s development under the new environment of new times, new
economy conditions, and new productive forces; (2) Their theories about enterprise’s activities under the
conditions of the open market economy. The most important point of their theories is “innovation”. A new
microeconomics theory, the law of increasing marginal utility, can be concluded based on a series of K.
Marks, F. Engels, and J. Schumpeter’s theories. This new theory not only analyzes how Xinfei Corporation
breaks through the law of diminishing marginal utility, but it also combines a new essential factor, “the
knowledge”, with productive forces, thereby forms the law of increasing marginal utility. The development
miracle of Xinfei Corporation is the innovation machine described in the law of increasing marginal utility,
and the inexhaustible power source for any company’s development.
2.2 The application of the law of increasing marginal utility
The law of increasing marginal utility based on the research of Xinfei Corporation has following
practical applications:
(1) Design “market innovation machine” under the knowledge economy system. Make corporations
develop based on this law. Create a new miracle of microeconomics growth.
(2) Show the most important difference between the knowledge economic system and the other
economic systems, i.e. forcing companies to unceasingly innovate by the pressure of market economy. The
effect released by innovation is to break the traditional economic law of diminishing marginal utility, to
prove the new economic law of increasing marginal utility, to create much more social wealth, and to make
society progress rapidly.
(3) Construct a theory system based on the law of increasing marginal utility. In the future, under the
knowledge economy, the competition between companies will no longer focus on the price, but on the
innovation. The mode, “compete → innovate → re-compete”, results in a miraculous economic
development. Therefore, in other words, the knowledge economy can be considered as a kind of cyclic
economy. And the law of increasing marginal utility for the 21st century can also be concluded as a
growing path: “innovate, innovate, and unceasingly innovate.”
(4) Construct a new mode for the enterprise management. The purpose of researching Xinfei
Corporation is to research its innovation and its management mode with combining hard technology and
soft technology together. Based on the law of increasing marginal utility, a new business management mode,
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Nature and Science, 5(3), 2007, Yihai Liang. Ten Propositions for Law of Increasing Marginal Utility
“21st Century Three-Color Business Management”, will be proposed.
3. The fundamental of the conjecture: five research subjects and ten propositions
We have studied Xinfei’s miraculous development, Xinfei’s road of new industrialization, and Xinfei’s
innovative management mode and effect. But the most important point is to construct the theory system
based on the law of the increasing marginal utility, and to prove its scientificalness and expansibility.
Innovation is the core of this theory system.
3.1 Five research subjects
Subject 1. Research of the core of the modern innovation: The integration of the engineering
technology and the modern business management technology.
Subject 2. Research of the mechanism of the modern innovation – the profit-driven mechanism: the
value of technology and business trade.
Subject 3. Research of the business resource configuration of a company and the applicable mode of
the innovation. It can prove the overflow effect of the innovation and the cyclic economy system. In other
words, it is the research of the process of knowledge economy.
Subject 4. Research of the economic effect of “the innovation machine”. This research can prove the
relation between marginal utility and the increasing profit.
Subject 5. Research of the development of “the innovation machine”. This research can explain the
relation between the innovation and the business benefits. It can also be used in the process of constructing
a harmonious society.
3.2 Ten propositions for the law of increasing marginal utility
We firstly research the knowledge economic system itself and the difference between this system and
other economic systems, then explain the development miracle of enterprise by innovation, and solve the
competition, the innovative change, the production innovation, the innovative spirit of entrepreneurs, the
system of innovation, the creation of harmonious society, and the technological innovation based business
exchange. All of these problems can be solved by the theory system of the law of increasing marginal
utility based on following ten propositions.
(1) The knowledge economy is the basic economy obtained by enterprise, having amazing increasing
rate, and having the characteristic of the law of the marginal utility. It is so-called the cyclic economy. The
cyclic economy includes four circulations: a) macroeconomics circulation, develop → innovate →
re-develop; b) microeconomics circulation, develop → invest → re-develop; c) integrated circulation for
production elements, integrate → select → re-integrate; d) combinational circulation for technology and
production, product → research → re-product.
(2) “The innovation machine” is the core of the microeconomics theory, including five parts: a) the
value of the innovation; b) the competition of the innovation; c) the mechanism of the innovation and its
revolution; d) the circulation and the cyclic economy based on the innovation; e) the relation between the
innovative motivation and the innovative profit.
(3) The “technological innovation” consistency for the personal profit and the social wealth: a) The
overflow effect of the technological innovation; b) the relation between the technology communication and
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Nature and Science, 5(3), 2007, Yihai Liang. Ten Propositions for Law of Increasing Marginal Utility
the driven-based innovation; c) the exchange value of the technological innovation; d) the league and
monopoly for the trade of the technological innovation; e) the new mode for the technological innovation
and the investment.
(4) The technology trading market for enterprises: a) the inner technological monopoly for an
enterprise; b) the market value of the technology trading; c) the inner and outer effects of the technology
trading; d) the role of market and market pressure in the technology trading.
(5) The substitution relation between the innovative driven factor and the personal profit: a) the
relation between the overflow effect of the innovation and the market pressure; b) the united innovative
system consisting of the marginal utility, the total cost, and the social benefit; c) the analysis for the optimal
model of the innovation.
(6) The compensation for the enterprises’ competition and innovation: a) the status and function of the
modern management technology; b) the new competition model for enterprises (the competition not for
price; c) the environment and effect of the innovation for production and process; d) the effect of the
successful innovation for the social welfare.
(7) The effect of the marginal utility for “the innovation machine”: a) the mechanism for the
compensation of the innovation’s cost; b) the relation between the innovation and the price (pressure); c)
the marginal cost and the maximum profit; d) the cost efficiency for the continuous large scale economy; e)
the rotating balance and the enterprise’s spiral development; f) the centralization of the innovation and the
release of the market effect.
(8) The core of the elements of production is the knowledge capital: a) the knowledge itself is a kind
of capital; b) the innovation of the knowledge capital and the energy effect of the financing innovation; c)
the function of the mechanism of the knowledge economy, i.e. the integration of price, innovation and
information.
(9) The optimal schedule model for enterprises. This is the second model of the law of increasing
marginal utility, for how to choose the innovation and how to optimize the innovation: a) the structure of
the optimal selection model; b) the effect of the optimal schedule; c) the optimal model for the combination
of the optimal schedule model and the optimal relation.
(10) The theory for the rules and the regulations of enterprises, which can guarantee the rapid
development of enterprises: a) the trade-off between the rule and the efficiency of the profit; b) the trade-off
between the innovation and the communication; c) the resource configuration of the technological
innovation trading; d) the efficiency of assignment for the innovation and the technological communication.
4. Expected research model and the business management pattern based on the innovation
The expected results are the law of increasing marginal utility and the business management pattern
based on this law, which consist of following contents:
(1) the innovation of the law of increasing marginal utility;
(2) the state-of-the-art economic theory based on this law;
(3) the business management pattern based on the innovation, including humanism, technology and
the innovation machine, which is so-called “Red-Blue-Green” Three-Color Business Management;
(4) the model of the law of increasing marginal utility.
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Nature and Science, 5(3), 2007, Yihai Liang. Ten Propositions for Law of Increasing Marginal Utility
4.1 The description and the model of the law of increasing marginal utility
This model is a theory for describing the economy increase, and belongs to microeconomics.
(1) The important research of this model is the increase of economy. The input variables of the model
are technology, human resource, and capital. The output is the increment of economy. This model shows
the function of economic activities and economic relations.
(2) This model is described by a differential equation. This differential equation shows the relation
between input variables, time and some specific conditions. It illustrates the increasing property of the
economy.
(3) Denote input variables C, M, N and K as control variable, dynamic human variable, technology
variable, and capital respectively. MaxV means the optimal increasing economy [3].
(4) The mathematic model is as: MaxV =
∫
T
0
u[ M (t ) ⋅ N (t ) ⋅ K (t ) ⋅ C (t ) ⋅ T ]dt , where t is time,
and u is the basic function [4].
4.2 “Red-Blue-Green” Three-Color Business Management
4.2.1 Red Business Management
The red business management considers technology as the management core, converts economic
resources from one place with lower productivity to another place with higher productivity, and realizes the
theory of “Technology is the first productivity”. The economy of the USA in 1990s can be considered as an
economy for startup. Knowledge, technology and creativity are its three power sources. The purpose of
business management is converting knowledge into wealth. Therefore, creation becomes the main
behavioral path of technology. In other words, the “creation” is the process of the activity of red business
management. The environment of red business management consists of six risks: risk of chance, risk of
technology, risk of market, risk of capital, risk of management, and risk of environment. The creation can
be divided into four stages: recognizing and estimating the technological chances in market; designing the
creative management; creating and acquiring resources; creating business management. The four
fundamental factors of red business management are: creator, human resource, technology, and capital.
4.2.2 Blue Business Management
Blue business management is a kind of management transforming the management of quality to the
management of culture. Its main characteristics are:
(1) it is a human-based business management;
(2) it is a standard management for how people should think and behave in a specific society;
(3) it is a management combining ideology into development of material;
(4) it is a blue culture-based management;
(5) it is a management to show “the law of increasing marginal utility” in knowledge economy.
In one word, blue business management can release a huge effect of wealth. Its theoretical structure
includes:
(1) the value of an organization is the core;
(2) the purpose is the huge profit increase;
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(3) the main body of blue management system is intellectual resource;
(4) the method of blue management is to enlarge people’s intelligence by innovative machines;
(5) the basic mode of blue business management is a kind of management based on humanity.
4.2.3 Green Business Management
Green business management is to guide an enterprise to develop under a reasonable environment. The
main functions of green business management are realizing large-scale management, diversifying contents
of management, and guaranteeing an enterprise to safely develop. Its theoretical structure including:
(1) creating a good environment for development;
(2) optimizing market resources for management;
(3) combining technology, capital and traditional management theories into a new integrated pattern
for the modern business management;
(4) this modern business management consists of ten innovation systems (thought innovation, rule
innovation, stimulus innovation, dynamic innovation, production innovation, method innovation, strategy
innovation, decision innovation, organization innovation, and technology innovation).
(5) the new pattern and systems are the product transformation system, technological innovation
system, management innovation system, capital innovation system, human stimulus system.
5. Conclusion
The law of increasing marginal utility and its ten propositions are considered as economic “Goldbach
Conjectures”. They are an innovative theory of economics. Based on this theory, we can construct the
movement of knowledge economy era, create a new Three-Color business management mode, and find a
new path for enterprises to generate much more profit than ever before.
Correspondence to:
Yihai Liang
College of Economics and Management
Ping Yuan University
Xinxiang, Henan 453003, China
yihailiang@gmail.com
Received: 9/13/2007
References:
1.
K. Marx and F. Engels. 1972. The Manifesto of Communism. Beijing People’s Press.
2.
J. Schumpeter. 1999. Capitalism, Socialism and Democracy. The Commercial Press.
3.
Yuan Shu and Hua Li. 1998. The Increasing Model for Economy Development. Fudan Press.
4.
Herbert Simon. 1982. Models of Bounded Rationality, vol. 1 and 2. MIT Press.
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